Rent vs. Buy Calculator - Should I Rent or Buy?

What Impacts the Rent vs Buy Calculation?

Calculating whether it's worth it to buy a home or to rent requires not just current prices and values, but also your expectations of the future.

Purchasing a home requires you to make a down payment, which can be in the tens of thousands of dollars depending on your loan type and home purchase price. If you were to rent instead of buying, you could have used this initial down payment along with the home’s potential closing costs to invest instead. This is an opportunity cost of buying a home.

How Does the Rent vs. Buy Calculator Work?

The rent vs buy calculator calculates the total cost of buying a home and the total cost of renting a home. The total cost is not just the price of the home or the monthly cost of rent. Instead, the calculator takes into account interest on the mortgage, closing costs, maintenance, utility, and insurance costs, and optional condo fees. Maintenance, utility, and insurance costs will increase annually at an expected inflation rate. You can adjust this inflation rate in the calculator.

The calculator then subtracts from the total cost any benefits that you may receive from owning a home. This includes any expected appreciation in the value of the home. For example, if the price of the home is expected to increase $100,000 over 10 years, then the total cost of buying a home will be reduced by $100,000 if you stay in the home for 10 years.

Tax deductions also reduce the cost of owning a home. If you benefit from itemized deductions, where your annual mortgage interest is greater than the standard deduction of $12,400, then the difference can be deducted from your tax at your marginal tax rate. This is then subtracted from the cost of buying on an annual basis.

If you are renting, your monthly cost of rent is likely to increase over time. The calculator accounts for your monthly rent to increase at 2% annually, but it can be adjusted.

Opportunity Costs of Buying vs Renting

The calculator also looks at the opportunity cost of renting vs buying, which is the amount of money that you can have earned (or saved) should you have chosen the other option instead.

If you are buying a home, you will need to save up a sizable down payment and save enough to afford the closing costs of the home. Even though programs such as Georgia’s Dream Homeownership program provide assistance to some eligible borrowers, the down payment is still a big ticket item. If you were to rent, you could have used the money saved for a down payment and the closing costs to invest instead. Since you miss out on potential gains and used the money to buy a home, this adds onto your cost of buying as a negative factor.

Renting vs Buying a House

Knowing whether buying or renting a home is better depends on three key numbers: how much rent would cost, how much a home would cost, and how long you expect to stay in your home. While it is relatively easy to figure out the first two numbers, such as by searching for an area’s average home price and monthly rent, the number of years you will stay depends entirely on you.

Generally, renting is the recommended choice if you plan on staying in a home for a short period of time. Renting is quick and easy, and this flexibility does not lock you into a certain home for an extended period of time unlike a mortgage. Buying a home will result in a large amount of upfront costs, from closing costs to hefty down payments, which wouldn’t make sense if you plan on moving in the near future, or might be something that you cannot afford at the moment.

If you plan on settling down into a home for the long-term, buying a home would be the better choice. Renting means that your monthly rent payments will be going towards your landlord, as opposed to mortgage payments which will gradually build up value in the form of equity in your home. Staying in a home over the long haul will also mean that the initial upfront costs associated with buying a home can be spread out over a longer period of time.

Even though you might not know exactly how long you will stay in a home for, you can predict this based on your own personal situation. If you are a recent graduate and you are often moving around cities for work, you may not exactly be looking to buy a home just yet. Mortgage lenders may require you to have a good credit score. If you do not have a good credit score or an established credit history, it can be difficult for you to qualify for a mortgage. Those with a bad credit score may consider getting an FHA loan which has a minimum credit score requirement of 500. If you are establishing a family and laying down roots, buying might be a more suitable option compared to renting.

Something that can also affect your decision to buy or rent is the state of the housing market. If you feel that current housing prices are too high, you might decide to rent for the time being in the hopes of house prices falling in the future. You can check rent affordability calculator to make sure that you can afford the rent you are paying and have some savings left for purchasing a house. If house prices do fall in the future, you would then be able to buy a house at a discounted price. If house prices do not fall and continue to rise, or even if they stay the same, waiting on the sidelines will cost you money as you continue to rent.

Comparing Renting vs. Buying

What Do These Parameters Mean?

• Equity in Home: Building up home equity gives you ownership over an important asset. You can use your home equity to secure loans, such as a home equity line of credit (HELOC). Renting does not give you equity in a home.
• Gain From Home Value Appreciation: Since you own the home, you will be able to sell the home later. If the home value increases, you will be able to sell it for a gain. You do not benefit from increases in home prices if you are renting.
• Flexible: Buying a home locks you into a mortgage with a lengthy application process. Rental applications are much quicker and don’t lock you into a contract for years.
• Upfront Costs: Closing costs and saving up for a down payment means that purchasing a requires a lot of money upfront. Renting is more affordable, oftentimes with just a security deposit of a months’ rent required.
• Tax Deductions: You can deduct interest that you pay on your mortgage from your taxes.
• Maintenance Costs: Being a homeowner means that you have to take care of your property out of your own pocket. If you are renting, the landlord is usually responsible for maintenance costs.
• Credit Score: Your credit score can mean the difference between being approved or declined for a mortgage. It can also impact the interest rate that you receive, which can significantly increase costs if your credit score is poor. Although landlords can also check the credit score of potential tenants, having a poor credit score will not significantly increase your renting costs. However, having a poor credit score can also make it harder to rent.

Benefits of Buying a Home vs Renting

One benefit that homeowners receive is the ability to receive tax deductions based on the interest that they pay on their mortgage. This is based on the annual mortgage interest paid, up to a mortgage principal of $750,000, should you file an itemized deduction. For a standard deduction, you can claim $12,550 as a single filer, $25,100 as joint filers or $18,800 as a head of household. This reduces your total cost of owning a home.

If you make a down payment less than 20%, your lender will require you to get private mortgage insurance. Mortgage insurance, or PMI, is tax deductible if your annual income is less than $100,000. You can receive a tax deduction for mortgage insurance premiums, FHA MIP, USDA loan fees, and VA loan fees paid.

Owning a home means that you will be building equity in your home. Should your home value increase, or as your loan-to-value (LTV) ratio decreases as you make mortgage payments, you can use this equity through a home equity loan or a home equity line of credit (HELOC). This gives you a cheap source of financing should you need it, which otherwise would not be available if you were renting. If you sell your home at a higher price, you may also make a gain on the sale. If the home is occupied as your primary residence, you may not have to pay capital gains tax under certain amounts.

If you buy your home, you are less likely to move and would not only save in your moving costs but also avoid the bump in living costs which generally occurs after each move.

Last but not least, some factors do not go into the calculator; for example, being a homeowner can help you feel pride, achievement, safety and security. Such feelings can improve your psychological well-being.

Renting vs. Owning a Home Statistics

Did you know that the United States has among the lowest percentage of homes owned outright by their owners among OECD countries? The majority of homeowners in the U.S. have a mortgage on their home. Renters in the U.S. also rent at private rental prices, while countries like France, Austria, and Germany have sizable subsidized rents.

This can be broken down further based on statistics by the OECD. 25% of American households own their home outright, 40% own their home with a mortgage, and 34% rent their home. The majority of American households own their home, and the majority of American homeowners have a current mortgage on their home. However, a sizable proportion of Americans rent their home, at just over a third of all households. The proportion of renters in the U.S. is similar to other developed countries, while the U.S. has the largest proportion of homeowners that have a mortgage.

Renting vs. Owning Statistics for OECD Countries

Source: OECD Affordable Housing Database (2019)

Renting vs. Owning Statistics for OECD Countries (2010 - 2019)

Source: OECD Affordable Housing Database (2019)

The median monthly rent in the United States has increased by 255% from 1988 to 2021. In 1988, the median monthly rent was $343. In 2021, the median monthly rent was $1,216.

Meanwhile, the median price of a home in the United States has increased by 307% over the same time period. The median home price was $59,200 in 1988, and it has grown by 307% to a median home price of $241,000 in 2021.

This shows that home prices have risen more than rent has over the past three decades. A household that purchased a home in 1988 may have seen their home value triple, while a household that rented a home in 1988 may have seen their rent increase by just over double.

U.S. Median Rent by Region (1988 - 2021)

Source: U.S. Census Bureau, Current Population Survey/Housing Vacancy Survey, February 2, 2022

U.S. Median Home Sales Price by Region (1988 - 2021)

Source: U.S. Census Bureau, Current Population Survey/Housing Vacancy Survey, February 2, 2022

U.S. Homeownership Rate (1964 - 2021)

U.S. Homeownership Rate by Age (1994 - 2021)

U.S. Homeownership Rate by Family Income (1994 - 2021)

U.S. Homeownership Rate by Race and Ethnicity (1994 - 2021)